By Edward Moya
US stocks have been struggling for direction all week after a mixed bag of earnings was accompanied with economic data that supports the idea that the economy is weakening. It looks like the economy is still headed for a recession, but that might reinforce US Fed pivot calls which still seems to be driving some inflows back into equities.
The ECB delivered a third major consecutive rate increase across all three key rates on Thursday. The 75-basis point hike was well telegraphed and the comment that ‘inflation remains far too high” indicates more massive rate increases could be warranted.
They signaled they expect to raise rates further and markets are still convinced that they could raise rates by 75bp again in December. It seems the market is convinced that the ECB’s hiking cycle won’t have to be as aggressive next year and traders are now expecting rates to peak at around the 2.75% level.
Changes in the targeted longer-term refinancing operations (TLTROs) that provide financing to credit institutions, signals they are going to remove some of the excess liquidity and incentivise the banks to pay back cheap loans before rates go up.
US GDP and more
The US economy appears to have bounced back from those two negative GDP readings with a solid 2.6% improvement with economic activity. The strong headline number is welcome news, but when you dig into the numbers it is clear that an economic slowdown is here. The international trade component helped this quarter and that obviously won’t continue going forward. Consumer spending is softening and prices are coming down quickly. Business investment is clearly weakening.
The labor market remains tight as jobless claims edged slightly higher. Hiring freezes will become a growing trend across corporate America, but layoffs still seem distant as job openings still remain healthy.
Fed expectations still widely expect a 75 basis point rate increase next week and for a downshift to a half-point in December. The Fed won’t want to lock themselves into softening their stance against fighting inflation before the data confirms pricing relief.
The economy is slowing and that is sending Treasury yields lower as recession bets grow. Safe-haven flows are powering both the yen and dollar today as global recession risks grow.
A lot went wrong for big-tech on Friday; Apple’s holiday outlook underwhelmed, inflation pain is more noticeable, and unfavorable exchange rates will hurt future sales. The news was not all terrible for Intel shares after posting solid results alongside the announcement of a cost-cutting plan that will save $10 billion by the end of 2028.
The key theme across this round of mega-cap results is that an earnings slump is here as inflation cripples an already weak consumer.
Mark Zuckerburg is looking reckless here. Meta shares plunged on Thursday after revenue collapsed and they decided to nearly double their CAPEX. It looks like Sheryl Sandberg’s departure was well-timed as this ship is clearly sinking. Artificial Intelligence (AI) investment was boosted and now everyone is expecting Meta to have a free cash flow problem.
Caterpillar did not disappoint this earnings season. The heavy-equipment maker did everything right last quarter. Caterpillar posted a strong earnings beat, trimmed their CAPEX budget a little, signaled demand is strong and that highlighted that margins momentum will continue next quarter. Caterpillar also noted ‘some pockets’ of supply chain improvement. What was also very positive is that Asia/Pacific sales were little changed despite the slowdowns that have hit that part of the world.
Apple shares pared losses after CFO Maestri’s optimistic comments about seeing strong demand for products. Apple’s earnings weren’t terrible like Amazon or Meta’s results. Apple did post record revenue and delivered a three-cent EPS beat. Service revenue, iPad revenue, and sales in China disappointed.
Macro headwinds are not killing iPhone sales just yet, but the outlook is clearly deteriorating. Strong Mac sales as kids returned to school helped compensate for soft iPhone sales.
Amazon shares plunged after their outlook showed that households and corporations are watching their budgets. Poor sales guidance of revenue between $140 billion to $148 billion was much lower than the $155.5 billion analysts were expecting. The macro backdrop appears a lot worse than what we were hearing from companies that reported at the start of earnings season.
Crude prices are softening ahead of massive oil giant earnings reports. Right now, energy traders want to see if Exxon and Chevron are going to show they are willing to commit more money into new wells. The Biden administration is hoping big oil can provide a boost to the economy by increasing production and sending prices down.
The oil market has benefited from a weaker dollar and hope for a strong Chinese economic rebound, but now the focus is shifting towards recession risks that are dragging down the crude demand outlook forecasts for the rest of the year.
Gold prices continue to consolidate as exhaustion after what looks like could be another solid week of gains. A short-term peak for the dollar appears to be in place for the dollar and that is good news for gold.
Bitcoin softens towards $20,000 as risk appetite struggles to find its footing. The macro backdrop got a lot worse this week after a wild week of earnings and economic data. Cryptos will likely consolidate further until next week’s FOMC meeting, which means Bitcoin might give back the key $20,000 level.
Edward Moya is Senior Market Analyst, The Americas at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.